If the real interest rates change in an economy due to a rise in income what is the impact on Money supply?
a. Quantity of Money supplied will increase
b. Quantity of Money supplied will decrease
c. Quantity of Money supplied will not change
d. None of the above
choose the right choice
To determine the impact on money supply when real interest rates change in an economy due to a rise in income, we need to understand the relationship between the two.
When income rises in an economy, it typically leads to an increase in consumption and investment. This can result in an increased demand for money. On the other hand, changes in real interest rates influence the cost of borrowing and the return on savings, which can affect the demand and supply of money.
In this case, if the rise in income causes an increase in the demand for money, and the supply of money remains unchanged, this would lead to an excess demand for money. To satisfy this increased demand, the central bank of the economy may increase the money supply.
Therefore, the correct choice would be:
a. Quantity of Money supplied will increase